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Looking for bubbling in real estate boomlet

Published: Saturday, April 6, 2013 at 9:44 p.m.

Last Modified: Saturday, April 6, 2013 at 9:44 p.m.

The boomlet in Southwest Florida's housing market over the past year has been so vast that it is raising "B-word" questions again — as in "bubble."

Though opinions vary widely, even those who dismiss the notion that another housing bubble is in the works say they are concerned about rising home values and the proliferation of bidding wars that are reminiscent of the mid-2000s.

But missing from the current scenario are the easy-to-access loans later packaged by Wall Street firms into securities — a key trigger for the downturn.

"Part of the thing that drove up the last cycle was the ease of credit, and I don't see that being the case anymore," said Michael Moulton, an agent with Michael Saunders & Co. on Longboat Key.

"I just don't think it will get that crazy."

Less uncertain is the direction of the market, which is at its healthiest point in nearly a decade, monthly sales figures and Realtor data show.

The infusion of cash from Wall Street hedge funds like The Blackstone Group into Southwest Florida's real estate market, coupled with demand from retirement buyers, has swelled prices from Parrish to Punta Gorda.

Add in an inventory of homes for sale at its lowest level in a decade, and you have what some pessimistic industry experts see as a market aligning dangerously close to its pattern at the onset of the last boom in the early 2000s.

But fears of a bubble are far from mainstream. Many still believe that the market will correctly adjust before it balloons too high.

They point to the overwhelming number of cash buyers — some two-thirds of all residential deals involve cash, according to realty firms — and more stringent lending requirements, which have largely eliminated the threat of the toxic loans that propelled the last housing bubble and exacerbated the impact when it burst.

Jack McCabe, a Deerfield Beach real estate consultant who accurately predicted the rise and fall of the last market, represents one of the most ardent doomsayers.

"These investors are paying ridiculous amounts of money for property that just does not justify it," McCabe said. "If we get to the point where these homes are no longer affordable to the general public, we are in for our next bust."

But University of Central Florida economist Sean Snaith points to the very different landscape during this run-up in demand and pricing.

"I just don't see this as a replay of the last bubble," Snaith said. "You don't have exotic mortgages and people getting loans who had no business" buying a house.

Paying 45% more

There is no denying the real estate frenzy.

An influx of investors led by Blackstone, among the nation's largest private real estate owners, have flooded into Southwest Florida to buy up distressed properties for use as rentals.

In many cases, the cash-powered institutions have bullied traditional home buyers and smaller investors out of foreclosure-buying opportunities by routinely paying well above the bank's asking price — sometimes even when no other parties are bidding, data from researcher RealtyTrac Inc. and a Herald-Tribune analysis of property transactions show.

So far, these groups have paid, on average, 45 percent more for the homes in Manatee and Sarasota counties than the properties' value, RealtyTrac's analysis shows.

Sustained demand for real estate from traditional buyers also has whittled down housing inventory to just five months' worth at the current sales pace, leaving slim pickings for buyers to choose from, records show.

Brokers say the result is something of a frenzy among buyers for certain classes of properties, because they fear they also must overpay to land the home they have been waiting for — which, in turn, drives up prices further. The institutional investment purchases also set asking prices for future bank-owned properties and for comparables used in appraisals.

There are a lot of things that "can come back to bite us," said Drew Peterson, a specialist in distressed property with Re/Max Alliance Group in Sarasota.

"The result could mean a lot more inventory and not as many buyers because of the higher prices."

The idea behind the new corporate strategy being employed by Blackstone and others: Give their purchases a quick facelift, then rent them out for three to five years before selling to a publicly held real estate investment trust or other group when values rebound further.

But many local brokers believe these so-called "smart money" companies are making poor buying decisions, which could weigh down the rental returns they have projected.

If that occurs and they all decide to sell at roughly the same time, prices could bottom out with another oversaturation of inventory, said Daren Blomquist, RealtyTrac's vice president.

In other words, another bubble.

"The big problem lies with buyers who may try to over-extend themselves to compete," Blomquist said. "That's the problem we saw in the last bubble.

"By driving up the prices on their own purchases, (the investors) also are pushing up prices across these neighborhoods."

But others do not see it happening that way. They predict the market will plateau at a more modest 5 percent growth in prices this year.

Although prices have been rising more quickly than that in the past year, the numbers can be somewhat deceiving because they do not take into effect how far values slid during the crash, say observers who doubt the bubble scenario.

Other indicators of a mending economy, including job gains and robust stock performance, also should help keep the housing market moving, said Moulton, the high-end Michael Saunders & Co. broker.

Speculation buying

Agents across Southwest Florida sold 19 percent more homes last year than they did during 2011, helping boost the region's median sales price by $21,800, Realtor association data shows.

Those prices were bolstered further by bulk foreclosure buyers, who paid an average of $127,146 for homes in Sarasota County last year. Those same properties were valued at only an average $93,479, RealtyTrac's analysis showed.

In Manatee County, many of the same buyers shelled out an average of $136,624 for properties with an estimated worth of $94,208 on average, the research shows.

New York-based Fundamental REO is one such buyer.

Since Thanksgiving, the firm has bought 14 homes in Manatee and Sarasota at a significant mark-up from the prices paid just a short time earlier.

Fundamental paid $139,000 for a 1,431-square-foot house in Parrish, for instance, just two months after the previous owner paid $89,300, records show.

Fueled solely by speculation that the market will continue rising, those are the type of short-term price spikes that could ultimately harm the housing recovery, said Shannon Moore, broker and owner of Green Lion Realty in North Port and Port Charlotte.

Since October, affiliates of Blackstone have bought 276 rental properties in Sarasota and Manatee counties. Minnesota-based Two Harbors Investment Corp. has purchased at least another 82.

RealtyTrac estimates that smaller investment companies following the same buy-and-hold model snapped up 388 properties in Southwest Florida last year and 5,289 across Florida.

Many of those homes are acquired at auctions, or from bulk portfolio sales lenders hold. In those cases, prices are often evaluated based on replacement costs and projected income streams and not on relative values.

"They're paying way too much at auction," Moore said. "I just don't see how they can get rents to cover what they paid. The numbers just don't make sense."

No credit deals

If these investors get in too deep, some say the worst that will happen is they will suffer losses to investor capital and move on.

Analysts note that unlike the last housing rush, the market today is not being fueled by credit purchases that ultimately gave way to the banking meltdown — perhaps the most dangerous component of the housing market in the mid-2000s.

During the last housing boom in 2003, lenders were writing loans on a whim, funneling a demand that drove home prices in Florida up to their highest on record.

When the market crashed four years later, sending values plummeting by as much as 60 percent, those bad loans led to the foreclosure crisis that continues to weigh down the Sunshine State's legal system today.

The housing bust also was the primary driver in Wall Street's financial collapse, an implosion that forced several mortgage giants like Lehman Bros. to fold and caused others to seek salvation from taxpayer-supported bailouts.

Those dangers are largely absent from the present situation, thanks to higher underwriting standards for most borrowers. Like institutional investors, most baby boomers also are paying cash, alleviating the risk of excess mortgages.

Most real estate watchers expect price increases and inventory struggles to continue through most of 2013. The big unknown is how fast prices will continue to rise.

"It's always a game of follow-the-leader, and right now, these institutional investors are the leader," said Anthony Lolli, founder and chief executive of New York's Rapid Realty, which also operates his own real estate school. "These big companies can roll the dice with huge amounts of cash.

"It's a dangerous market for your amateur real estate buyer or investor," he said. "They can get hurt when they look at all of these numbers that are artificial."

<p>The boomlet in Southwest Florida's housing market over the past year has been so vast that it is raising "B-word" questions again — as in "bubble."</p><p>Though opinions vary widely, even those who dismiss the notion that another housing bubble is in the works say they are concerned about rising home values and the proliferation of bidding wars that are reminiscent of the mid-2000s.</p><p>But missing from the current scenario are the easy-to-access loans later packaged by Wall Street firms into securities — a key trigger for the downturn.</p><p>"Part of the thing that drove up the last cycle was the ease of credit, and I don't see that being the case anymore," said Michael Moulton, an agent with Michael Saunders & Co. on Longboat Key.</p><p>"I just don't think it will get that crazy."</p><p>Less uncertain is the direction of the market, which is at its healthiest point in nearly a decade, monthly sales figures and Realtor data show.</p><p>The infusion of cash from Wall Street hedge funds like The Blackstone Group into Southwest Florida's real estate market, coupled with demand from retirement buyers, has swelled prices from Parrish to Punta Gorda.</p><p>Add in an inventory of homes for sale at its lowest level in a decade, and you have what some pessimistic industry experts see as a market aligning dangerously close to its pattern at the onset of the last boom in the early 2000s.</p><p>But fears of a bubble are far from mainstream. Many still believe that the market will correctly adjust before it balloons too high.</p><p>They point to the overwhelming number of cash buyers — some two-thirds of all residential deals involve cash, according to realty firms — and more stringent lending requirements, which have largely eliminated the threat of the toxic loans that propelled the last housing bubble and exacerbated the impact when it burst.</p><p>Jack McCabe, a Deerfield Beach real estate consultant who accurately predicted the rise and fall of the last market, represents one of the most ardent doomsayers.</p><p>"These investors are paying ridiculous amounts of money for property that just does not justify it," McCabe said. "If we get to the point where these homes are no longer affordable to the general public, we are in for our next bust."</p><p>But University of Central Florida economist Sean Snaith points to the very different landscape during this run-up in demand and pricing.</p><p>"I just don't see this as a replay of the last bubble," Snaith said. "You don't have exotic mortgages and people getting loans who had no business" buying a house.</p><p><b>Paying 45% more</b></p><p>There is no denying the real estate frenzy.</p><p>An influx of investors led by Blackstone, among the nation's largest private real estate owners, have flooded into Southwest Florida to buy up distressed properties for use as rentals.</p><p>In many cases, the cash-powered institutions have bullied traditional home buyers and smaller investors out of foreclosure-buying opportunities by routinely paying well above the bank's asking price — sometimes even when no other parties are bidding, data from researcher RealtyTrac Inc. and a Herald-Tribune analysis of property transactions show.</p><p>So far, these groups have paid, on average, 45 percent more for the homes in Manatee and Sarasota counties than the properties' value, RealtyTrac's analysis shows.</p><p>Sustained demand for real estate from traditional buyers also has whittled down housing inventory to just five months' worth at the current sales pace, leaving slim pickings for buyers to choose from, records show.</p><p>Brokers say the result is something of a frenzy among buyers for certain classes of properties, because they fear they also must overpay to land the home they have been waiting for — which, in turn, drives up prices further. The institutional investment purchases also set asking prices for future bank-owned properties and for comparables used in appraisals.</p><p>There are a lot of things that "can come back to bite us," said Drew Peterson, a specialist in distressed property with Re/Max Alliance Group in Sarasota. </p><p>"The result could mean a lot more inventory and not as many buyers because of the higher prices."</p><p>The idea behind the new corporate strategy being employed by Blackstone and others: Give their purchases a quick facelift, then rent them out for three to five years before selling to a publicly held real estate investment trust or other group when values rebound further.</p><p>But many local brokers believe these so-called "smart money" companies are making poor buying decisions, which could weigh down the rental returns they have projected.</p><p>If that occurs and they all decide to sell at roughly the same time, prices could bottom out with another oversaturation of inventory, said Daren Blomquist, RealtyTrac's vice president.</p><p>In other words, another bubble.</p><p>"The big problem lies with buyers who may try to over-extend themselves to compete," Blomquist said. "That's the problem we saw in the last bubble. </p><p>"By driving up the prices on their own purchases, (the investors) also are pushing up prices across these neighborhoods."</p><p>But others do not see it happening that way. They predict the market will plateau at a more modest 5 percent growth in prices this year.</p><p>Although prices have been rising more quickly than that in the past year, the numbers can be somewhat deceiving because they do not take into effect how far values slid during the crash, say observers who doubt the bubble scenario.</p><p>Other indicators of a mending economy, including job gains and robust stock performance, also should help keep the housing market moving, said Moulton, the high-end Michael Saunders & Co. broker.</p><p><b>Speculation buying</b></p><p>Agents across Southwest Florida sold 19 percent more homes last year than they did during 2011, helping boost the region's median sales price by $21,800, Realtor association data shows.</p><p>Those prices were bolstered further by bulk foreclosure buyers, who paid an average of $127,146 for homes in Sarasota County last year. Those same properties were valued at only an average $93,479, RealtyTrac's analysis showed.</p><p>In Manatee County, many of the same buyers shelled out an average of $136,624 for properties with an estimated worth of $94,208 on average, the research shows.</p><p>New York-based Fundamental REO is one such buyer.</p><p>Since Thanksgiving, the firm has bought 14 homes in Manatee and Sarasota at a significant mark-up from the prices paid just a short time earlier.</p><p>Fundamental paid $139,000 for a 1,431-square-foot house in Parrish, for instance, just two months after the previous owner paid $89,300, records show.</p><p>Fueled solely by speculation that the market will continue rising, those are the type of short-term price spikes that could ultimately harm the housing recovery, said Shannon Moore, broker and owner of Green Lion Realty in North Port and Port Charlotte.</p><p>Since October, affiliates of Blackstone have bought 276 rental properties in Sarasota and Manatee counties. Minnesota-based Two Harbors Investment Corp. has purchased at least another 82.</p><p>RealtyTrac estimates that smaller investment companies following the same buy-and-hold model snapped up 388 properties in Southwest Florida last year and 5,289 across Florida. </p><p>Many of those homes are acquired at auctions, or from bulk portfolio sales lenders hold. In those cases, prices are often evaluated based on replacement costs and projected income streams and not on relative values.</p><p>"They're paying way too much at auction," Moore said. "I just don't see how they can get rents to cover what they paid. The numbers just don't make sense."</p><p><b>No credit deals</b></p><p>If these investors get in too deep, some say the worst that will happen is they will suffer losses to investor capital and move on.</p><p>Analysts note that unlike the last housing rush, the market today is not being fueled by credit purchases that ultimately gave way to the banking meltdown — perhaps the most dangerous component of the housing market in the mid-2000s.</p><p>During the last housing boom in 2003, lenders were writing loans on a whim, funneling a demand that drove home prices in Florida up to their highest on record.</p><p>When the market crashed four years later, sending values plummeting by as much as 60 percent, those bad loans led to the foreclosure crisis that continues to weigh down the Sunshine State's legal system today.</p><p>The housing bust also was the primary driver in Wall Street's financial collapse, an implosion that forced several mortgage giants like Lehman Bros. to fold and caused others to seek salvation from taxpayer-supported bailouts.</p><p>Those dangers are largely absent from the present situation, thanks to higher underwriting standards for most borrowers. Like institutional investors, most baby boomers also are paying cash, alleviating the risk of excess mortgages.</p><p>Most real estate watchers expect price increases and inventory struggles to continue through most of 2013. The big unknown is how fast prices will continue to rise.</p><p>"It's always a game of follow-the-leader, and right now, these institutional investors are the leader," said Anthony Lolli, founder and chief executive of New York's Rapid Realty, which also operates his own real estate school. "These big companies can roll the dice with huge amounts of cash.</p><p>"It's a dangerous market for your amateur real estate buyer or investor," he said. "They can get hurt when they look at all of these numbers that are artificial."</p>